Section 103.2 is renumbered as section 103.3 and is amended to provide that except where the National Association of Insurance Commissioners’ (“NAIC’s”) 2019 valuation manual (the “Manual”) conflicts with any provision of the Insurance Law or regulations promogulated thereunder, the valuation manual is adopted in its entirety, subject to the effective dates and other requirements specified in the rule that deviate from the valuation manual.

A new section 103.1 is added to specify the purpose of this Part, which is to prescribe the minimum standards for valuing statutory reserves subject to the requirements of the Manual.

A new section 103.4 (“valuation of individual term life insurance reserves”) is added to specify the minimum valuation standards for individual term life insurance policies issued on or after January 1, 2020. The minimum aggregate reserve shall be the greater of: (1) the sum of the greater of the cash surrender value and 70% of the minimum reserve for each policy determined under the current valuation requirements; and (2) the minimum aggregate reserve calculated in accordance with the methodology and assumptions prescribed by the Manual prior to reflecting any reinsurance ceded. An insurer may submit a request to the Superintendent to delay the implementation of the minimum valuation standards for individual term life insurance policies subject to section 103.4, such that the minimum valuation standards will be effective for policies issued on or after January 1, 2021, upon a demonstration of undue hardship, impracticability, or good cause, subject to the Superintendent’s approval.

A new section 103.5 (“valuation of payout annuity reserves”) is added to specify the minimum valuation standards for payout annuities with premium determination dates on or after January 1, 2019. Insurers are given the following three options to determine the maximum valuation interest rates for policies and contracts with premium determination dates during 2019: (1) the current requirements prescribed by Insurance Law section 4217(c); (2) the current requirements prescribed by Insurance Law section 4217(c) where the reference rate defined by Insurance Law section 4217(c)(4)(F) is reset monthly for jumbo contracts and quarterly for non-jumbo contracts; or (3) the lesser of the rate determined in accordance with section VM-22 of the Manual with certain adjustments, including setting the prescribed portfolio credit quality distribution to 5% treasuries, 45% AA bonds, 50% A bonds and placing a 200 basis point cap on spreads, and the rate determined in accordance with section VM-22 of the Manual without adjustments. For policies and contracts with premium determination dates on or after January 1, 2020, the maximum valuation interest rate shall be determined in accordance with option (3) as stated above. The minimum reserve must be the greater of the minimum reserve calculated in accordance with the current valuation requirements, except that the maximum valuation interest rate must be as determined in accordance with this section, and the minimum reserve calculated in accordance with the methodology and assumptions prescribed by the Manual.

A new section 103.6 (“valuation of variable annuity reserves”) is added to specify the minimum valuation standards for variable annuities effective for valuations on or after January 1, 2020. For policies and contracts issued prior to January 1, 2020, the minimum reserve must be the greater of the minimum reserve calculated in accordance with the methodology and assumptions of the Standard Scenario Reserve prescribed by the 2017 Actuarial Guideline XLIII with certain adjustments and the minimum reserve calculated in accordance with the methodology and assumptions prescribed by the Manual. Such adjustments to the Standard Scenario Reserve prescribed by the 2017 Actuarial Guideline XLIII affect the mortality, discount rate and lapse rate assumptions.

For policies and contracts issued prior to January 1, 2020, insurers are granted a three-year phase-in for any reserves in excess of the greater of the aggregate minimum reserves determined in accordance with the 2017 Actuarial Guideline XLIII and the aggregate minimum reserves determined in accordance with the Manual.

For policies and contracts issued on or after January 1, 2020, the minimum reserve must be the greater of the minimum reserve calculated in accordance with the methodology and assumptions of section 103.6(e) and the minimum reserve calculated in accordance with the methodology and assumptions prescribed by the Manual. Section 103.6(e) dictates that the minimum reserve must be the greater of the standard scenario reserve, cash surrender value, and option value floor and prescribes the required methodology and assumptions, including those for discount rates, fund returns, mortality, lapse rates, and election rates, in order to calculate such amounts.

A new section 103.7 (“valuation of all other reserves”) is added to specify the minimum valuation standards for individual life insurance policies issued on or after January 1, 2020 and group life insurance policies, annuity contracts, and accident and health insurance contracts issued on or after January 1, 2021, for which sections 103.4, 103.5, and 103.6 of Part 103 do not apply. The minimum reserve must be the greater of the minimum reserve calculated in accordance with the current valuation requirements and the minimum reserve calculated in accordance with the methodology and assumptions prescribed by the Manual. Aggregation at the level prescribed by the Manual is permissible for individual life insurance. An insurer may submit a request to the Superintendent to delay the implementation of the minimum valuation standards for individual life insurance policies subject to section 103.7, such that the minimum valuation standards will be effective for policies issued on or after January 1, 2021, upon a demonstration of undue hardship, impracticability, or good cause, subject to the Superintendent’s approval.

A new section 103.8 (“reinsurance”) is added to prescribe the determination of reinsurance reserve credits for policies and contracts subject to Part 103. A credit for reinsurance must equal the difference between the minimum reserve calculated prior to reflecting reinsurance ceded and the greater of the reserve using the current reinsurance accounting requirements and the reserve determined in accordance with the Manual after reflecting reinsurance ceded.

A revised RIS, RFA, RAFA and JIS are not required for the adoption of the First Amendment to 11 NYCRR 103 (Insurance Regulation 213) because the non-substantive revisions to the regulation do not require a change to the previously published RIS, RFA, RAFA and JIS.

As a rule that requires a RFA, RAFA or JIS, this rule will be initially reviewed in the calendar year 2023, which is no later than the 3rd year after the year in which this rule is being adopted.

The New York State Department of Financial Services (“DFS”) received one submission of comments from an association of life insurers (“association”).

Comment: The association requested that the regulation include a small company exemption consistent with the principle-based reserving (“PBR”) exemption for life insurance policies provided in the valuation manual (the “Manual”) published by the National Association of Insurance Commissioners (“NAIC”).

Response: The regulation does not disallow the Manual’s PBR exemption for life insurance policies. Insurers that qualify for the exemption may utilize it accordingly. Therefore, DFS did not make any changes in response to this comment.

Comment: The association requested that section 103.1 state that the regulation is not applicable to non-New York domestic companies that meet the definition of “reinsurers” under the federal Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) due to federal law pre-emption.

Response: DFS did not make any changes in response to this comment because 15 U.S.C. § 8222 already provides that a reinsurer’s domiciliary state is solely responsible for regulating the financial solvency of the reinsurer if the domiciliary state is an NAIC accredited state or has financial solvency requirements substantially similar to the requirements necessary for NAIC accreditation.

Comment: The association requested that insurers be provided additional time to implement the new variable annuity reserving requirements and to elect the option to use linear grading over three years for variable annuity reserves on policies issued prior to January 1, 2020, because the date by which insurers must determine whether to select the grade-in option, set forth in section 103.6(b)(2)(ii) as March 31, 2020, provides insufficient time to make such a determination.

Response: DFS considered the request and determined that no additional time is necessary to implement the new variable annuity reserving requirements, because the regulation does not require insurers to make a determination about the grade-in option by March 31, 2020. If elected, insurers must first establish the excess grade-in reserves by December 31, 2020 pursuant to section 103.6(b)(2)(ii)(a). Therefore, DFS did not make any changes in response to this comment.

Comment: The association proposed revising section 103.4(a), which provides that section 103.4 applies to all individual term life insurance policies, whether directly written or assumed through reinsurance, issued on or after January 1, 2019, to include an explicit reference to section VM-20 of the Manual.

Response: DFS did not make any changes in response to this comment because the scope of section 103.4 sets forth the appropriate insurance policies to which the section applies at present. DFS will consider future changes if the scope of VM-20 in the Manual is updated.

Comment: The association recommended revising “50.0/3%” to “50.0%/3” within section 103.5(c)(3)(i)(a)(2)(ii)(A)(III) when describing the credit quality percentage allocation to A bonds.

Response: DFS agrees with this comment and has made the requested non-substantive change to the regulation.

Comment: The association proposed revising section 103.5(c)(3)(i)(a)(2)(ii)(B) such that the 200 basis points cap on spreads apply to the average credit quality at the level of Aa/AA and A/A, rather than at the more granular level of Aa1/AA+, Aa2/AA, Aa3/AA-, A1/A+, A2/A, and A3/A-.

Response: DFS has considered the comment but remains confident that the methodology detailed in the regulation produces the necessary amount of conservatism. Therefore, DFS did not make any changes in response to this comment.

Comment: The association noted that the quarterly valuation rate, Iq, applied within the daily valuation interest rate formula for jumbo contracts referenced in section 103.5(c)(3)(i)(b)(1) has been adjusted to remove Baa/BBB spreads; whereas, the other elements of the referenced formula, the change observed in a series of indexes between the prior quarter and the immediately prior day, are based on indexes that have 40-50% investment in Baa/BBB bonds. The association proposed adjusting the indexes to a higher credit quality benchmark to avoid the basis risk noted and then removing the cap on the daily valuation interest rate for jumbo contracts defined in section 103.5(c)(3)(i)(b)(2).

Response: DFS has considered the comment but remains confident that the methodology detailed in the regulation produces the necessary amount of conservatism. Therefore, DFS did not make any changes in response to this comment.

Comment: The association proposed revisions to section 103.5(c)(3)(i)(b)(1) to clarify that the quarterly valuation rate, denoted by Iq, is the unrounded quarterly rate.

Response: The quarterly valuation rate, denoted by Iq, is the final rate determined in accordance with section 103.5(c)(3)(i)(a). Therefore, DFS did not make any changes in response to this comment.

Comment: The association requested clarification that the credit quality weights used to calculate the default cost in “D” defined in section 103.5(c)(3)(i)(b)(2)(ii) are based on the credit quality distribution listed in section 103.5(c)(3)(i)(a)(2).

Response: The association’s interpretation is correct. DFS has made a non-substantive revision to section 103.5(c)(3)(i)(b)(2)(ii) to clarify that “D” is based on the portfolio credit quality distribution defined in section 103.5(c)(3)(i)(a)(2)(ii)(A).

Comment: The association commented that section 103.5(c)(3)(ii) appears to be superfluous as section 103.5(c)(3)(i)(a) is already defined in such a way that the discount rate cannot exceed the rate defined in the Manual. The association further suggested renumbering section 103.5(c)(3)(ii) to 103.5(c)(3)(i)(b)(3) if DFS feels it necessary to apply such cap to the jumbo rates.

Response: DFS considered the comment; however, no changes were made as DFS finds it necessary for the regulation to explicitly state that the cap imposed by section 103.5(c)(3)(ii) applies to both non-jumbo and jumbo valuation interest rates.

Comment: The association proposed adding a title heading to section 103.5(d).

Response: DFS does not believe that a title heading for this section is necessary. Therefore, DFS did not make any changes in response to this comment.

Comment: The association commented that the option value floor detailed in section 103.6(e)(5) should be removed. The association requested, however, that if the option value floor must remain, it should be an aggregate calculation, not a seriatim calculation. Furthermore, the association requested that the option value floor not apply to policies that use the “Alternate Methodology” under Section 7 of VM-21 of the Manual.

Response: DFS did not make any changes in response to this comment because the option value floor is intended to be a seriatim calculation.

Comment: The association proposed reorganizing section 103.6(b)(2) and 103.6(b)(3) to clarify that the minimum reserve calculated in accordance with the Manual should be determined in aggregate for contracts issued prior to, on or after January 1, 2020.

Response: The minimum reserve calculated in accordance with the Manual is determined in aggregate for policies issued prior to, on or after January 1, 2020. This amount is then allocated to each contract, which is used in section 103.6(b)(2) and 103.6(b)(3) to calculate the minimum reserve. Since the minimum reserve calculated in accordance with the Manual is an aggregate calculation, no change to the regulation is necessary.

Comment: The association proposed replacing the references to 11 NYCRR 99 (Insurance Regulation 151) in section 103.6(e)(2) with the 2017 Actuarial Guideline XLIII. The association believes that the inclusion of such reference will lead to the use of valuation standards of updated versions of Actuarial Guideline XLIII, as adopted by the NAIC’s Accounting Practices and Procedures Manual (“APPM”).

Response: The references to Insurance Regulation 151 included in section 103.6(e)(2)(i) and 103.6(e)(2)(i)(a) will not lead to the use of valuation standards of the APPM because such references only apply to contracts without, or disregarding any, guaranteed benefits. Therefore, DFS did not make any changes in response to this comment.

Comment: The association believes that the reference to section 103.6(e)(2)(ii)(b) within section 103.6(e)(2)(iii)(c)(1) is a typographical error and should instead reference section 103.6(e)(2)(ii)(a).

Response: DFS agrees with this comment and has made the non-substantive change to the regulation.

Comment: The association proposed deleting the requirement of section 103.6(e)(2)(iv) that implies that a contract with more than one guaranteed benefit will require multiple model runs.

Response: Insurers may save on model run-times and decrease the operational burden where intuitive arguments or demonstrations support doing so. Therefore, DFS did not make any changes in response to this comment.

Comment: The association proposed revising section 103.6(e)(3)(vi)(d) to reference section 6.C.5 of VM-21 of the Manual with certain adjustments for the guaranteed minimum withdrawal benefit election rates.

Response: DFS considered the comment and did not make any changes because the regulation appropriately reflects the intended differences from the Manual.

Comment: The association commented that section 103.6(e)(3)(vi)(d)(2) implies that election rates must be redetermined for each policy at each valuation date and contradicts section 103.6(e)(3)(vi)(d)(6), which states that “the calculations prescribed by this clause only shall need to be performed once for a given set of contracts with a certain issue age, guaranteed benefit product, and tax status”.

Response: DFS has considered this comment and has determined that the wording is unnecessary and therefore has removed it from section 103.6(e)(3)(vi)(d)(2), as a clarification.

Comment: With respect to variable annuity contracts issued on or after January 1, 2020, the association expressed concerns about the different mortality assumptions made for projection periods before and after benefit election as prescribed by section 103.6(e)(3)(viii). The association recommended using the 2012 Individual Annuity Mortality Basic Table with adjustment factors throughout the projection.

Response: DFS has considered the comment but remains confident that the methodology detailed in the regulation produces the necessary amount of conservatism. Therefore, DFS did not make any changes in response to this comment.